Time to Consider Investing in the U.S. Home Market?

The long, discontented winter for the U.S. home market might be easing. Home prices are inching up in some markets, and it might be a good time to invest.

That doesn’t mean that every place makes sense for homebuying. Nationally, new-home sales fell by the largest amount in more than a year in March–7.1%–so there’s no widespread rebound under way, according to the U.S. Commerce Department.

You’ll still have to be incredibly careful and look at several factors such as local job growth, housing inventories, and price trends. Whether you’re looking to relocate, eyeing a retirement locale, or scouting investment properties, caution is still essential.

Foreclosures and excess inventory will continue to hurt key markets. “I think we’ll see a strange housing market for the next couple of years, where foreclosures and vacancies continue at the same time as new construction grows rapidly,” said Ingo Winzer, president of real estate information service Local Market Monitor.

With the exception of Washington and perhaps Boise, markets in Arizona, California, and Florida were pummeled in the downturn, with some areas suffering 50% markdowns from the peak of the bubble.

Bright Spots
Although good news is in short supply, there’s a tinge of optimism surfacing on U.S. real estate. Local Market Monitor reported recently that its housing demand index is in expansion status, compared with 64 months of contraction that began in 2006. The strongest markets generally are experiencing robust job growth, which typically is one of the linchpins of any strong housing market. Rebounding regional industries are boosting some areas such as Austin, Texas; Bakersfield, Calif.; Boise, Idaho; Ogden, Utah; Dallas; and Grand Rapids, Mich., according to the Metro Monitor from the Brookings Institution. These were among the strongest-performing metropolitan markets Brookings surveyed.

Clusters of strong industries make a huge difference in real estate recoveries. Information technology businesses in Austin; Boise; Ogden; Portland, Ore.; Provo, Utah; and San Jose, Calif., (Silicon Valley) are seeing growth. Other industries in recovery mode are manufacturing–particularly auto production–and high technology. Meanwhile, areas once supported by old-line industries–such as Allentown, Pa.; Little Rock, Ark.; Atlanta; Fresno, Calif.; and Philadelphia–aren’t faring as well.

Indeed, those areas hardest-hit by the bubble bursting and the Great Recession are struggling. While you’re seeing some evidence that the downturn might be bottoming out, places like Las Vegas; Los Angeles/Central California; Tucson, Ariz.; and Tampa, Fla., are among the worst performers.

In terms of price increases, however, it appears that the most devastated areas are slowly coming back. They’ve not recovered to 2006 levels–and may never–but there’s strong evidence that they’ve turned the corner. Here’s a short list of areas from Realtor.com with the best year-over-year price increases (through March 2012):

Rooting Out Real Bargains
Prices alone, however, aren’t necessarily a green light to buy. In cities where housing inventories are high and foreclosures are ongoing, you’ll continue to see downward pressure on prices. List prices are still falling in Chicago; Knoxville, Tenn.; Southern California; Sacramento, Calif.; and several cities in Pennsylvania, including Philadelphia. That means even though some areas appear to be recovering, it might be some time before prices stabilize.

For absolute bargains, the best prices are found where the price-to-rent ratio–a gauge that shows where buying makes the most sense–is still favoring homeownership, according to Trulia.com. These cities include Detroit; Oklahoma City; Dayton, Ohio; Toledo, Ohio; Grand Rapids, Mich.; Cleveland; Atlanta; and Memphis, Tenn. Of course, many, if not most, of these areas have been hurting from massive job losses from older industries, so they might not be the best places to buy if you’re expecting quick price appreciation.

Ultimately, if you’re interested in a long-term investment, you’ll need to look at areas that have the greatest chance of sustaining job growth well into the future. These markets are not to be confused with those offering the best values now, though some might offer some bargains relative to cities that have traditionally been the highest-priced, such as those in Silicon Valley.

Using Local Market Monitor’s 24-month forecasting model, San Jose/Santa Clara, Calif.; Houston; Austin; McAllen, Texas; Fort Worth, Texas; Rochester, N.Y.; Pittsburgh; Louisville, Ky.; Oklahoma City; and Knoxville, Tenn., might offer the best opportunities for price appreciation, which ranges from 1% to 4% during the next two years.

Much of the new optimism hinges on foreclosures leveling off and job growth continuing. Another boost might come from proposed changes that may allow homeowners whose mortgages are owned by Freddie Mac (FMCC) and Fannie Mae (FNMA) to stay in their homes through refinancing or writing down principal.

Because this is an election year, it’s probably a safe bet that Washington will do everything it can to show some progress on housing. In the interim, keep your eye on places where home inventories are falling, jobs are being created, and prices are stabilizing. You could find some excellent values if you do your homework.

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